Superannuation is a long term investment, make sure you treat it like one

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“It’s your time in the market, not your timing of the market that will have the most impact on your final balance at retirement1”.

When it comes to retirement savings, you’re in it for the long haul. Source: Adobe Stock

Superannuation is a long term investment by nature. As you look over your statements and updates through the years, you’ll see that some years your investments may go backwards, especially if the share market hasn’t had a great year. It might be hard to look at your reduced value portfolio in some year-end reports, but if you hang in there, over the long term, you’ll see the overall trend is upward. Trust this trend. Don’t be spooked by market volatility. Whatever you do, don’t try to sell your way out of a market downturn.

You have the right to choose. Start by choosing growth.If you’re in a retail fund that allows it, make sure you exercise your right of choice. Most super funds offer a selection of options for your portfolio. It could be balanced, growth, conservative or a cash option1.

If you’re young (in super terms that means under 50), you have time on your hands, so you can choose a higher growth option. As you approach retirement age (less than 10 years to retirement), you have less time to recover from your investment’s volatility. You may be better off moving a portion of your portfolio’s assets to cash and term deposits2.

If you have a Self Managed Super Fund (SMSF) your decisions are bigger than just choosing a risk profile or growth option. You have the power to select individual shares, property and other assets, and making good decisions requires doing research and analysis. When in the growth phase most SMSF investors prefer shares and property (and other growth assets) to cash and term deposits.

Shares are growth assets; generally, they increase in value, in a rising market, at a faster rate than cash. They may offer extra value via payments of dividends but this is secondary to the value offered by their capital growth3. Of course, as we know, sometimes shares decrease in value too.

Share markets constantly surprise usMarket factors are changing all the time. Share prices are influenced by many factors, and it’s a rare (or non-existent) investor who can anticipate market movements. Accepting that superannuation is a long term investment will help you stay immune to the temptation to sell when the market is down. It will go up again (eventually). Experienced, brokers and market commentators often make predictions that are completely inaccurate. If they can’t always get it right, what chance do you have?

For example, between July 2015 and Feb 2016 the Australian share market fell 13%. By 30 June 2016, it had mostly recovered, ending the year only slightly in the negative. Australia is not only subject to its own domestic influences, but also international forces like Brexit, the Trump presidency, Greek debt and Chinese currency depreciation. For a while the share market reflected a period of global uncertainty4.

As international markets adjusted to the new world order of Brexit, Trump and other factors, the market’s overall trend has been up. Source: Yahoo Finance

The market will go down again. And up. And down. You simply must get your head around this and not try to avoid it, or worse, try to beat it.

Market volatility is normal, don’t get spooked. Source: Adobe Stock

The cost of continuous tradingAnother cost of continually selling and buying shares is increased broker costs, which drain your fragile short-term capital gains even further2. Every time you trade, you pay broker costs for the transaction. They seem small per transaction, but if you continue to trade they will add up, and whittle away any gains you’re making on your briefly held shares.

There’s also a time cost to trying to anticipate and beat market movements. If you’re an SMSF holder you could dedicate hours to reading material related to shares and the market, selling, buying and analysing your transactions. It’s time you could spend on many other activities if you are willing to choose good quality shares (with the help of an adviser) and trust the market over the long-term.

Sometimes it is OK to sellWe’re not saying you should never sell your shares. If you do have an investment in a company that is in real trouble and no longer a viable investment, your financial adviser or broker is likely to warn you and advise you to sell (probably taking a loss). When the directive to sell comes from a trusted market expert, it’s advice you should follow.

Compound interest – the friend of every long-term cash investorAt some point of your retirement journey you will be advised to move your portfolio into cash and term deposits. There’s no need to say goodbye to capital growth though. Even though shares are considered the real ‘growth assets’, don’t underestimate the power of compound interest. Once you switch out of shares and into cash or term deposits your balance will still grow steadily, perhaps not with the speed of growth assets but without the ups and downs.

Sit tight and listen to adviceThe balance in your superannuation account on the day you retire is the product of many forces. Most of them are outside of your control. So, consider carefully those factors that you can control (e.g. what you invest in and for how long). First of all, never forget that superannuation is a long term investment and if your portfolio includes shares, be prepared to ride out market volatility while you still have ten years or more before retirement.

Once your retirement date is less than ten years away, your ability to ride out share price volatility reduces, and it might be appropriate to shift your share portfolio towards cash and term deposits.

Your best source of information when it comes to making decisions about your super investments is your financial adviser. It’s their job to watch the market, and they’ll be the person telling you when it’s really time to sell shares. In the meantime, hang in there for the long term, it’s your best bet for a prosperous retirement.

Over to youDo you try to beat the market? Does it work for you? Let us know in the comments.
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This article is published by Modoras Pty Ltd ABN 86068034908 AFS and Credit License No. 233209. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.